Aug. 8 (Bloomberg) -- European Central Bank President Mario
Draghi’s bid to bring down Spanish and Italian yields may spur
the nations to sell more short-dated notes, swelling the debt
pile that needs refinancing in the coming years.

Yields on Italian and Spanish two-year notes plunged after
Draghi said on Aug. 2 the ECB may buy debt on the “short-end of
the yield curve” as part of a broader crisis-fighting plan. The
gap between Spain’s two-year and 10-year yields rose on Aug. 6
to the widest in at least two decades, while the spread between
similar Italian securities also approached a record.

The average maturity of Spanish debt is the shortest since
2004 as Spain, like Italy, hasn’t issued 15- or 30-year bonds
all year. As Prime Ministers Mario Monti and Mariano Rajoy fight
to avoid bailouts that may threaten the euro’s survival, the
ECB’s plan risks adding to pressure on the two nations’
treasuries.

“In a way what the ECB has done is making the situation
worse,” said Nicola Marinelli, who oversees $160 million at
Glendevon King Asset Management in London. “Focusing on the
short-end is very dangerous for a country because it means that
every year after this they will have to roll over a much larger
percentage of their debt.”

Refinancing Mountain

The average maturity of Italy’s debt is 6.7 years, the
lowest since 2005, the debt agency said in its quarterly
bulletin. The target this year is to keep that average at just
below seven years, according to Maria Cannata, who heads the
agency. In Spain, where the 10-year benchmark bond yields 6.94
percent, the average life is 6.3 years, the lowest since 2004,
data on the Treasury’s website show.

“Driving down the short-dated yields provides a little bit
of comfort and encourages Spain and Italy to issue more at the
short-end,” Marc Ostwald, a strategist at Monument Securities
Ltd. in London, said. “The problem is that you are building up
a refinancing mountain.”

Draghi said potential bond purchases, which would be
coordinated with Europe’s rescue fund, would focus “on the
short end of the yield curve” because “this falls squarely
within the range of classical monetary policy instruments.”

Spain has already asked for a European bailout of as much
as 100 billion euros ($124 billion) for its banks and Rajoy is
fighting to maintain enough access to debt markets to fund the
budget deficit. He opened the door to seeking more external help
on Aug. 3, saying he would consider triggering Draghi’s bond-buying plan if it served “Spaniards’ best interests.”

Bank Bailout

By selling shorter-term debt, Spain has been able to issue
72 percent of the bonds it plans to sell this year. Draghi’s
proposal may buy time for the government, which doesn’t face any
bond redemptions until October, when it has to pay back 29
billion euros of debt.

“Spain doesn’t have to come to the bond market until
October,” said Steven Major, head of fixed-income research at
HSBC Holdings Plc in London. “There’s time for the government
to put in place new measures.”

The ECB’s previous efforts to stabilize markets have fallen
short. It bought more than 200 billion euros of debt from
Greece, Ireland, Portugal, Italy and Spain, and while the
initiative helped slow the ascent of yields, all bar Italy have
had to seek some kind of external help.

In a renewed effort to solve the crisis, the ECB lent banks
about 1 trillion euros for three years in December and February,
with Spanish banks among the main beneficiaries. As loans were
channeled into sovereign debt purchases, bond yields fell, and
then resumed their ascent as the impact wore off.

Renewed Effort

Rates on two-year Spanish notes dropped to as low as 3.38
percent on Aug. 6, the least since May 9, from a euro-era record
of 7.15 percent on July 25. That widened the difference in yield
between two-year notes and 10-year bonds to 343 basis points,
the most since Bloomberg began collecting the data in 1993. The
yield spread was 302 basis points at 12:30 p.m. in London,
compared with an average over the past five years of 167 basis
points.

Spain hasn’t sold securities maturing after 2022 this year,
while in the same period a year ago it sold bonds maturing in
2024, 2026, 2037 and 2041. The Treasury last issued 2041 bonds
in May 2011 at an average yield of 6 percent. Those bonds
yielded 7.26 percent on the secondary market today.

Italy hasn’t sold debt maturing after 2026 this year. It
last sold 2040 bonds at an average yield of 5.43 percent in May
2011 and the yield is 6.48 percent in the market today.

“There is a shortening of the duration on the bonds, which
increases the roll-over risk,” said Thomas Costerg, an
economist at Standard Chartered Bank in London. “We don’t see
what the ECB said last week as a game-changer, there are still
sizable implementation risks and investors may lose patience.”